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Suppose the term structure of interest rates for risk-free zero-coupon bonds is as follows: Term 1 year 2 year 3 year 4 year 5 year Rate (EAR)%4.

2.00

What is the fair price of a risk-free investment that pays $1,000 at the end of Years 1, 2, and 3, and given that price, what is the single rate of interest that could be used to fairly value this annuity? Choose the best answer.

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a.$2,801.64; 3.34%

b.$2,810.19; 3.50%

c.$2,828.61; 3.00%

d.$2,820.14; 3.16%

e.$2,810.19; 3.34%

 

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